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    The Lawletter Blog

    TRUSTS: Judicial Evaluation of a Trustee's Exercise of Discretion

    Posted by Gale Burns on Wed, Nov 30, 2011 @ 17:11 PM

    The Lawletter Vol 36 No 4

    Jim Witt, Senior Attorney, National Legal Research Group

    In McPherson v. McPherson, 705 S.E.2d 314 (Ga. Ct. App. 2011), the Court of Appeals of Georgia reviewed the law governing the extent of a trustee's discretion that has been bestowed upon him or her by the trust instrument as to making distributions from the trust.  The case shows that even where a trustee is given broad discretion, complications can arise in the analysis of whether the trustee has abused that discretion.

    The settlor, Howard E. McPherson, had four adult children from his first marriage at the time he established the trust:  Scott, Lisa, Robin, and Eric.  Howard later remarried and had an additional child, also named Howard.  The trust provided that during Howard senior's lifetime,

    [t]he Trustee shall . . . have the discretion to pay out of income, if any, or principal or both of this trust such amount or amounts, whether equal or unequal and whether the whole or a lesser amount,  to  the  Trustor's  children . . . as may be needed for their support, maintenance, education and medical needs in reasonable comfort, taking into consideration any other means of support they or any of them may have to the knowledge of the Trustee.

    Id. at 316 (court's emphasis).

    Scott was named as trustee.  In 1992, Scott consented to the addition of his three adult siblings as cotrustees.  From 1992 until his removal as a cotrustee, Eric received his equal share of distributions from the trust in accordance with the settlor's direction that the children be treated equally.

    In June 2004, Howard warned Eric that he was considering removing Eric as a cotrustee because of his difficult behavior, including refusing to sign legal documents after having verbally promised to do so, placing his girlfriend on the company payroll, and threatening to sue his siblings.  Soon thereafter, Eric sued his siblings for the first time.  In March 2005, Howard removed Eric as cotrustee and replaced him with Howard's lawyer.

    In July 2005, the trustees elected to distribute $300,000 of trust income per stirpes to each McPherson child.  However, $50,000 of Eric's share was given to subtrusts created for the benefit of his children; the trustees' motive for this was to create additional resources for Eric's children, given his attempt, by means of a false affidavit, to reduce his child support payments.  As to the remaining $250,000 due Eric, the trustees directed that $157,000 be deducted to account for the expense incurred by the trust in defending against Eric's first suit.  Eric therefore received a check for $93,000, which he negotiated without objection.

    Eric brought an amended version of his subsequent action, started in July 2006, in July 2009, alleging that the trustees' distributions from 2005 through 2008, and in particular their 2005 withholding of the $157,000 spent on the defense against his suit, had violated their fiduciary duties under the trust. Both sides moved for summary judgment.  The trial court granted the trustees' motion and denied Eric's.  On the appeal, Eric argued that the trustees had abused their discretion in failing to consider the needs of each of Howard's children, including the minor Howard, who was still living at home with his father.

    The court of appeals, in determining whether the trustees had abused their discretion or acted in bad faith in making the distributions in question, noted that the Revised Trust Code, as adopted in Georgia, did not require a trustee to consider the resources of a beneficiary in determining whether to distribute trust property.  See Ga. Code Ann. ' 53‑12‑245 ("Duty to investigate") ("A trustee shall not be under any duty to investigate the resources of any beneficiary when determining whether to distribute trust property to such beneficiary.").

    The court considered the following factors:  (1) the trust instrument affirmatively directed that the trustees consider beneficiaries' resources; (2) section 53-12-7, listing Revised Code provisions pertaining to trusts that could not be varied by the trust, did not include section 53‑12‑245 as a nonvariable Code provision; and (3) section 53-12-260 maintained the common-law rule that a trustee's discretionary powers must be exercised "in good faith."

    The court looked to Restatement (Third) of Trusts:

    "(1)      A discretionary power conferred upon the trustee to determine the benefits of a trust beneficiary is subject to judicial control only to prevent misinterpretation or abuse of the discretion by the trustee.

    "(2)      The benefits to which a beneficiary of a discretionary interest is entitled, and what may constitute an abuse of discretion by the trustee, depend on the terms of the discretion, including the proper construction of any accompanying standards, and on the settlor's purposes in granting the discretionary power and in creating the trust."

    705 S.E.2d at 318 (court's emphasis) (quoting Restatement (Third) of Trusts ' 50 (2003)).

    The court stated:

    Thus, as the common law has long had it, a court may interpose its judgment on the performance of a trustee vested with discretion to make payments to a beneficiary only when the trustee "arbitrarily declines to make any payment" or when the trustee "is acting from improper motives in exercising discretion."  C. & S. Nat. Bank, 254 Ga. at 141(9), 327 S.E.2d 192. "The question of motives and conflict of interest arises when the trust gives discretionary powers to make payments to a trustee who is also the beneficiary of such payments."  Id.

    Id.

    The court also quoted that portion of Comment e to section 50 that pertains to the situation in which the trust directs that the trustee, in determining the amount of distributions, "is to consider the other resources but has some discretion in the matter":

    "[T]he presumption is that the trustee is to take the beneficiary's other resources into account in determining whether and in what amounts distributions are to be made, except insofar as, in the trustee's discretionary judgment, the settlor's intended treatment of the beneficiary or the purposes of the trust will in some respect be better accomplished by not doing so."

    Id. (court's emphasis) (quoting Restatement ' 50 cmt. e).

    The court noted that where there are concurrent discretionary distributees who are to take per stirpes, the different lines of beneficiaries are to be given similar, impartial, but not necessarily equal treatment, with disparities to be justified on a basis consistent with the trust purposes.  The court concluded that Eric had not demonstrated that the trustees had ignored the beneficiaries' means of support, adding:

    But even if he had done so, these trustees could, in their discretion, exclude the beneficiaries' resources from their consideration on the basis of both (i) the trust instrument's grant to distribute "either equal or unequal" amounts to each of Howard's children, making no distinction between those from a first or a subsequent marriage, and (ii) the trustees' personal knowledge concerning Howard's intended treatment of them.  And the result of this exercise of discretionary power was equal per stirpes distributions, keeping in reserve their capacity (as they later testified) to meet any "extraordinary need" on "a case‑by‑case basis."

    Id. (court's emphasis).  The court concluded that it had no basis to judicially intervene in the trustees' consistent decisions to treat all beneficiaries, including themselves, equally in the form of per stirpes distributions.

    Thus, even in the absence of guidelines in the trust instrument itself, a trustee's discretion is subject to the standard of good faith; however, where the trust does provide directions as to the exercise of discretion, there must be compliance.

    Topics: legal research, The Lawletter Vol 36 No 4, trusts, trustee's discretion in making distributions, additional resources for beneficiary, fiduciary duty to trust, judicial control only to prevent misinterpretation, motives and conflict of interest if trustee is a b, per stirpes distributees given similar but not equ, Jim Witt

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